Forex Market Commentary and Analysis (26 October 2009)

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The euro came off vis-Ă -vis the U.S. dollar today as the single currency tested bids around the US$ 1.4845
level and was capped around the $1.5060 level. The common currency established a fresh
multi-month high before eroding and moving away from the
psychologically-important US$ 1.5000 figure.The common currency failed to sustain gains it scored after a Peopleâ€™s
Bank of China research report was released that favoured more euro purchases by
the central bank.Technically, todayâ€™s
intraday low was right around the 38.2% retracement of the move from $1.4480 to
$1.5060.The common currency was also
propelled lower on a growing view the U.S. dollarâ€™s sell-off may have been
overdone recently.Also adding to the
dollarâ€™s gains were reports in the Wall Street Journal and Financial
Times that the Fed is considering ways to remove liquidity from the system,
possibly through reverse repos.European
Central Bank member Liikanen reported the U.S.â€™s commitment to its strong
dollar policy is â€śjustifiedâ€ť and said strong exchange rate fluctuation â€śare
undesirable as they increase economic uncertainty.â€ťFrench finance minister Lagarde warned Franceâ€™s
labour market is set to wosen over the next several quarters.The September unemployment rate climbed 0.8% with
2.575 million now officially unemployed.German Chancellor Merkel indicated the formulation of monetary policy
will be â€śincredibly difficultâ€ť for her new government and pessimistically
warned the â€ścrisisâ€ť will extend into 2011.Data released in Germany
today saw the Novembe GfK consumer confidence survey decline to 4 from 4.2 in
October.European Central Bank member
Noyer warned â€śThere are signs
that parts of the financial industry have resumed risk taking practices
reminiscent of those which led to the crisis.â€ť In U.S. news,
the Chicago Fedâ€™s Midwest Manufacturing Index improved 1.0% to 82.3 in
September, the highest reading since February 2008.Euro
bids are cited around the US$ 1.4445 level.

ÂĄ/ CNY

The yen depreciated vis-Ă -vis the U.S. dollar today as the
greenback tested offers around the ÂĄ92.25 level and was supported around the ÂĄ91.55
level.Prime Minister Hatoyama reported
the â€śemployment and current situation still requires us to remain alert.â€ťHatoyama failed to provide specifics as to
how his Democratic Party of Japan administration would reduce Japanâ€™s
escalating public debt. Other media
outlets have joined Nikkei in reported Bank of Japan believes deflationary
pressures will remain in Japan
through at least 2011.The central bank
now sees core consumer prices excluding fresh food falling 0.5% in the year
starting 1 April 2011 with economic growth ramping up to 1.2%.It remains probable the central bank will not
increase interest rates anytime soon. The discontinuation of BoJâ€™s emergency
liquidity programs is sleighted for the end of December and any indication of a
change in that time frame could impact the yen.It is also possible the BoJ will indicate its schedule for these changes
as early as this week.In addition, Japanâ€™s Policy
Board may release its latest round of economic forecasts this week. The Nikkei 225 stock index climbed 0.77% to
close at ÂĄ10,232.62.U.S. dollar offers
are cited around the ÂĄ94.75 level.The euro moved lower vis-Ă -vis the yen
as the single currency tested bids around the ÂĄ136.80 level and was capped around
the ÂĄ138.45 level.The British pound moved lower vis-Ă -vis the yen as sterling tested bids
around the ÂĄ149.15 level while the Swiss
franc moved lower vis-Ă -vis the yen and tested bids around the ÂĄ90.30 level.
In Chinese news, the U.S. dollar strengthened
vis-Ă -vis the Chinese yuan as the greenback closed at CNY 6.8275 in the
over-the-counter market, up from CNY 6.8245. The pair moved higher after Zhou Hai, a
division chief at Peopleâ€™s Bank of China in Harbin, released a report indicating the
central bank should sell dollars for euro and yen and diversify its massive
foreign reserves portfolio.While this represented
Zhouâ€™s personal opinion and not PBoC policy, it was enough to move the markets,
especially given the size of Chinaâ€™s
massive US$ 2.273 trillion foreign reserve war chest.There remains widespread speculation the
central bank will accelerate the removal of monetary stimuli and liquidity from
the system, possibly resulting in further yuan appreciation.

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The
British pound depreciated vis-Ă -vis the U.S. dollar today as cable tested bids
around the US$ 1.6250 level and was capped around the $1.6395 level.Sterling continued
its correction lower after economic data released on Friday revealed the U.K.â€™s gross
domestic product fell 0.4% in the third quarter, defying expectations of a 0.1%
expansion.Traders reduced their
exposure to sterling under the renewed premise Bank of England may need to
expand its asset-purchasing program.Sterling had been bid
over the past couple of weeks on the growing perception the central bank would
be discontinuing or at least not enlarging its asset-purchasing program.BoE will publish its quarterly inflation
report next month and its quantitative easing program will surely be revised by
the MPC then. There is speculation the asset purchase program could balloon to
â‚¤250 billion from the current â‚¤175 billion.BoEâ€™s next Monetary Policy Committee meeting will be held on 4-5
November.MPC member Posen dovishly said
â€śThere is no evidence from relevant periods of U.K. or other major economiesâ€™
history that quantitative easing will result in high or sustained inflation.Thus, high inflation is not what we should be
worrying aboutâ€¦There are even indications that the recession â€“ now a severe but
normal one â€“ is coming to an end.â€ťMPC
member Miles said further quantitative easing decision will be dependent on
inflationary pressures.Cable bids are cited around the US$ 1.6080
level.The euro moved lower vis-Ă -vis the British pound as the single
currency tested bids around the â‚¤0.9095 level and was capped around the â‚¤0.9240
level.

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